A television screen at a post on on the trading floor of the New York Stock Exchange shows the decision of the Federal Reserve, Tuesday, to hold off taking further steps to boost the recovery. Nevertheless, the US Treasury bond market saw a selloff as investors sensed a stronger US recovery.

Richard Drew/AP

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WASHINGTON

Traders dumped U.S. Treasury debt Tuesday after strong retail sales data and a Federal Reserve policy announcement dampened hopes that the Fed will buy more bonds to stimulate the economy.

The yield on the 10-year Treasury note leaped above its highest closing level in more than four months after the Fed said short-term inflation is likely and the labor market recovery has strengthened.

An auction of $21 billion in 10-year notes drew strong interest and high bids, a sign that overall demand remains strong for the ultra-safe investments. The notes were priced to yield 2.08 percent, lower than the market yield at the time. That means bids came in higher than market prices, a sign of good demand.

The yield on the 10-year note rose all morning before the auction took place. Traders dumped Treasurys after the government said that retail sales rose 1.1 percent in February, the biggest gain since September. The strengthening labor market helped Americans buy more autos, clothes and appliances.

Positive economic news generally reduces demand for the low-risk Treasury bond market. Traders would rather put their money in investments such as stocks, which can deliver bigger profits when the economy is strong. Stocks rose sharply on Tuesday.

As demand for a Treasury falls, its yield rises. In effect, traders are demanding a slightly less-tiny return in exchange for holding a security with limited potential profits.

The 10-year yield rose again in the afternoon, after the Fed offered a more upbeat view of the economy and held off on bond-buying or other steps to boost the economy. Traders had hoped the Fed would signal its willingness to launch a fresh round of bond-buying. Disappointed, they sold Treasurys.

Bond-buying by the Fed tends to boost Treasury prices by increasing overall demand for them. Traders try to buy Treasurys ahead of the Fed because they know they will have a willing buyer.

The Fed also said that rising energy prices are likely to boost inflation temporarily. Inflation tends to hurtTreasurys by reducing the buying power of the fixed return that a Treasury holder collects from the government.

The 10-year yield hit a daily high after the Fed announcement of 2.12 percent. It hasn't closed above that level since Oct. 28, when it closed at 2.32 percent.

In other trading, the price of the 30-year Treasury bond fell $1.75 per $100 invested, pushing its yield up to 3.26 percent from 3.17 percent late Monday.

The yield on the two-year note rose to 0.36 percent from 0.33 percent. The three-month T-bill paid a yield of 0.08 percent, unchanged from late Monday.